Inside the Ruble Zone

October 14, 1994

THE dramatic ups and downs of the ruble this week throw into question the much-publicized Russian ``recovery.'' The summer's lower inflation and debt in Moscow showed that the economic reform program of Prime Minister Viktor Chernomyrdin was at least connected to something in the system. One could check the printing of rubles and institute tight monetary policy. But given structural problems in the Russian economy and the unpredictability of the Central Bank headed by Viktor Gerashchenko, it was only a matter of time before inflation rose and the ruble fell.

Which it did this week. On Monday and Tuesday the ruble fell a total of 27 percent. Wednesday President Boris Yeltsin fired acting Finance Minister Sergei Dubinin and called for the resignation of Mr. Gerashchenko. Yesterday the ruble roared back 20 percent - but only after a huge transfer of hard currency from the Central Bank. How long the Central Bank can bail the ruble out is not clear; Moscow has only about $6 billion in hard currency reserves.

Messrs. Yeltsin and Chernomyrdin need to stabilize the ruble. But the problem is that investors in Russia want dollars, not rubles. Until the economy itself is stable, rubles are a risk. Three forms of intervention can stabilize the ruble: The Central Bank can pump in currency. Outside institutions like the IMF and governments like the United States can make loans. Foreign corporations can invest.

Of the three, foreign investment is the most promising. Western corporations can get their foot in the door; private businessmen can speak more frankly with Russian officials about reform. After all, their money is tied up. The IMF, the US, and the European Union should continue helping the ruble for reasons of stability and to boost reforms accomplished so far, including ruble convertibility and a new stock market.

Mr. Yelstin blames speculators gone wild and an internal power struggle for this week's ``Black Tuesday.'' In part, yes. But this is not the main cause. Even with infusions of Western capital or a new tighter monetary policy, major problems remain.

First, Russia still lacks the institutions and laws that make for a growing economy. Tariff, trade, and tax laws and the most basic rules for doing business are not standardized.

Second, Russians have not yet learned to make things people want.

Foreigners are already investing in Russia, but not as much as they would if given rules and laws.